Settlement will also lead to "below-cost" prices, harming competition, B&N says.

Barnes & Noble today accused the US government of solving the e-book price fixing controversy in a way that will harm the bookseller and result in higher prices for customers. Barnes & Noble also makes the argument that a settlement proposed by the US government will lead to "below-cost" pricing that could drive retailers like Barnes & Noble out of the e-book business.

Essentially, Barnes & Noble seems to believe that the DOJ settlement will lower book prices for a while, but ultimately reduce competition and end up raising the prices consumers pay.

On April 11, the US Department of Justice filed suit against six major book publishers, and on the same day reached a proposed settlement with three of them. While the DOJ settled with Hachette Book Group, HarperCollins Publishers, and Simon & Schuster, it is continuing litigation against Apple, Macmillan, and Penguin Group.

Details of the settlement

The settlement would terminate the publishers' agreements with Apple and other e-books retailers, and prohibit them "for two years from entering into new agreements that constrain retailers’ ability to offer discounts or other promotions to consumers to encourage the sale of the publishers’ e-books." The proposed restrictions are in response to what the US government calls a conspiracy to eliminate price competition among stores selling e-books, raising the price of new books and bestsellers from $9.99 to $12.99, $14.99, or more.

The DOJ noted that publishers agreed "to pay Apple a 30 percent commission for each e-book purchased through Apple’s iBookstore and promised, through a retail price-matching most favored nation (MFN) provision, that no other e-book retailer would sell an e-book title at a lower price than Apple." In response, the proposed settlement prohibits the publishers from sharing competitively sensitive information with competitors and from agreeing to new MFN deals that would undermine the settlement agreement for five years.

Amazon and Barnes & Noble aren't defendants in the government complaint. The DOJ said the settlement would require publishers to grant retailers such as Amazon and Barnes & Noble the "freedom to reduce the prices of their e-book titles." But Barnes & Noble says the DOJ's remedy will harm the company and have the opposite of its intended effect—raising book prices instead of lowering them. The bookseller today laid out its argument in a court filing that PaidContent posted online as a PDF.

"The end loser of this unnecessary and burdensome regulatory approach will be the American public, who will experience higher overall average e-book and hardback prices and less choice, both in how to obtain books and in what books are available," Barnes & Noble said.

Although Barnes & Noble argues that the settlement disrupts the agency model that has led to reduced pricing, another section of the filing claims that terminating agency agreements will lead to "below-cost pricing" driving competitors out of the market.

"By requiring that distributors set e-book prices and limiting the ability of publishers to do so, the proposed settlement consolidates pricing in a highly concentrated sector of the industry—instead of the unconcentrated, competitive sector of publishers," Barnes & Noble said. "Unable to compete with below-cost pricing, e-book distributors will drop from the e-book space."

Those two arguments seem a bit contradictory, so we've asked Barnes & Noble if the company can provide clarification. As noted earlier, it's likely that Barnes & Noble believes the DOJ's solution will lower prices at first, but raise them in the long run by reducing competition. UPDATE: Barnes & Noble replied to us with a statement from general counsel Gene DeFelice, who says "The settlement is likely to lead to predatory pricing and increase monopoly by Amazon." The settlement will also decrease competition, leading to "less choice and increased prices in medium and long term," DeFelice said.

In any case, Barnes & Noble is clear in its court filing that it believes the DOJ is taking the wrong approach. The agency, Barnes & Noble wrote, doesn't understand the book publishing industry. With the proposed settlement, it seeks to become a regulator rather than simply enforce antitrust laws. The settlement's stipulations go beyond what is even requested in the initial complaint.

The complaint, Barnes & Noble said, seeks relatively simple relief, namely "termination of the offensive contracts, an injunction forbidding collusive activity, and restrictions on a retail price MFN and a price-tiering provision." The settlement goes beyond that by disrupting the "agency" model that Barnes & Noble says has helped break Amazon's monopoly on the e-book market and resulted in lower average book prices, Barnes & Noble claims.

Before Barnes & Noble started selling the Nook e-readers and e-books in 2009, Amazon sold more than 90 percent of e-books "due to a lack of competition in both e-book and e-reader sales as well as below-cost pricing in significant instances that deterred other e-book distributors from entering the e-book space," Barnes & Noble said.

Amazon's domination wasn't threatened until 2010 when publishers started distributing e-books through an agency model in which "pricing was controlled not by a single dominant player, but by numerous competitor publishers who compete vigorously among themselves," Barnes & Noble said.

"By shifting pricing decisions to a less concentrated sector of the industry (publishing), agency has allowed competition to thrive in e-book sales, both among publishers and distributors," Barnes & Noble said. Amazon's share of e-book sales is down to 60 percent, and average prices have dropped, according to Barnes & Noble, which used this chart to make its point to the DOJ:

The agency contracts that Barnes & Noble credits with increasing competition in the e-book industry would be terminated under the DOJ's proposed settlement, Barnes & Noble said.

Further, the bookseller argued that "[t]he settlement merits close scrutiny because it will positively harm Barnes & Noble and other brick-and-mortar stores by (1) declaring as null and void their agency contracts and forbidding the settling publishers from entering similar contracts with Barnes & Noble for two years except within complex regulatory exemptions; and (2) decreasing the payments that Barnes & Noble and other brick-and-mortar stores receive when they distribute e-books, thus jeopardizing their investments in the e-book industry, encouraging free riding, and discouraging future investment and other entrants... The proposed settlement is remarkable in that it does nothing to punish the purported colluding publishers and instead targets innocent third-parties such as Barnes & Noble."

Barnes & Noble said it is disproportionately harmed by below-cost pricing because it both distributes e-books and runs brick-and-mortar stores that have much higher costs than digital businesses. Low e-book prices make it hard for physical stores to compete by establishing "artificial price points that are below costs," the company said. Barnes & Noble claims the proposed settlement will accelerate the trend of relegating "brick-and-mortar booksellers more and more to the margins of the book industry and to serve as free advertising and showrooms."

The Authors Guild advocacy group is on Barnes & Noble's side here, with a blog post published Monday arguing that the Justice Department fundamentally misunderstands the book market and that its proposal would help Amazon resume anticompetitive behavior.

The case has several moving parts. Apple, for example, says it is prepared to go to trial to defend itself against the US government's accusations, saying the DOJ "sides with monopoly, rather than competition." European officials are also investigating claims that publishers colluded with Apple to keep e-book prices high.

The US case is being heard in the Southern District of New York, with a hearing scheduled for June 22. Motions by the government and defendants related to any proposed final judgment are scheduled to be filed by August 15.

105 Reader Comments

Barnes & Noble said it is disproportionately harmed by below-cost pricing because it both distributes e-books and runs brick-and-mortar stores that have much higher costs than digital businesses. Low e-book prices make it hard for physical stores to compete by establishing "artificial price points that are below costs," the company said. Barnes & Noble claims the proposed settlement will accelerate the trend of relegating "brick-and-mortar booksellers more and more to the margins of the book industry and to serve as free advertising and showrooms."

Can someone else explain to me how this is a concern for anyone else besides Barnes & Noble?

I mean, unless you're already selling at below cost, you can't raise prices and still be below cost. And if you are already selling at below cost, as a loss leader for your hardware, then what's the problem?

Is that graph supposed to be helping B&N's case? Because the way I read it, it says that prices went down as B&N started selling e-books and readers (which makes sense, because a new competitor was introduced to the market), but then prices have been flat since the agency model came into use, despite the agency model's supposed role in lowering prices. Am I misinterpreting something here?

I'm confused as to why people can sell software using an agency model, but can't sell ebooks using the same model.

The problem stems from the "Most Favored Nation" clause. If Apple just sold ebooks using an agency model, that would be fine. The problem is that the "Most Favored Nation" clause in Apple's contract forces all other ebook sellers, via the publishers, to also use the agency model.

Apple using this model is fine. Apple forcing Amazon to use that model when Amazon would prefer to use a wholesale model is not.

Barnes & Noble said it is disproportionately harmed by below-cost pricing because it both distributes e-books and runs brick-and-mortar stores that have much higher costs than digital businesses. Low e-book prices make it hard for physical stores to compete by establishing "artificial price points that are below costs," the company said. Barnes & Noble claims the proposed settlement will accelerate the trend of relegating "brick-and-mortar booksellers more and more to the margins of the book industry and to serve as free advertising and showrooms."

This is a fact of life regardless of the settlement. B&N should have seen this coming years ago. Booksellers and publishers alike scoffed at and feared e-books until Amazon made them realize that people actually WANT those things. Now B&N is trying to stave off the inevitable - their brick-and-motar business will only survive by becoming smaller and accomodating the reality of a changing marketplace.

Also, the starting poit of that graph is deceiving - go back another year, and I think you'll see the average price of e-books to be much lower. At least, that's how I remember it, but I suppose I could be wrong. I know e-books were much cheaper before B&N and the publishers decided to kill eReader.com (I guess it's not dead, but it little more than a romance novel store now, so it's dead to me).

I'm suspicious of that chart. I've been using a Kindle since 2009, and my impression has certainly been that since Apple entered and the agency model became standard prices have gone up (at least on the books I buy).

From that I infer that any change in the eBook market drives prices up.

Does that "average" graph lump in all of the free or 0.01 out-of-copyright books and 0.99 short stories that Amazon (and B & N?) sells?

I think you're probably correct on this one and their including all these component of the "long-tail" in their numbers while the NYTimes best seller average sale price would likely be a better indicator of potential pricing fixing. I cannot believe that the average sale price has gone down as we're still finding the occasional instance where a paperback with free shipping is cheaper than a digital download....

Targeted predatory pricing to drive competitors out of business is one of the nasty realities of the free market. Why should ebooks receive a special exemption?

If anything, predatory pricing in an industry that has few (if any) barriers to new entrants more likely benefits consumers than harms competition. You can't just raise prices again knowing another competitor can step in short of some sort of collusive behavior of the type Apple is currently being accused of.

Barnes & Noble today accused the US government of solving the e-book price fixing controversy in a way that will harm the bookseller and result in higher prices for customers. Barnes & Noble also makes the argument that a settlement proposed by the US government will lead to "below-cost" pricing that could drive retailers like Barnes & Noble out of business.

They (publishers) are just going to use this whole settlement as an excuse to jack up prices overall. They can no longer set sale prices for the distributor, so they will just increase the wholesale price instead. The old Agency price along with the MFN clause could certainly have been good for consumer, but the problem is it never happened. It was good for B&N because they could compete again, but bad for people that were already in the lead, like Amazon. That is all fine, but then publishers decided to get greedy since they set the price now. The only competition between publishers was how high could they go.

Barnes & Noble today accused the US government of solving the e-book price fixing controversy in a way that will harm the bookseller and result in higher prices for customers. Barnes & Noble also makes the argument that a settlement proposed by the US government will lead to "below-cost" pricing that could drive retailers like Barnes & Noble out of business.

I'm confused as to why people can sell software using an agency model, but can't sell ebooks using the same model.

The agency model itself isn't a bad thing. The problem in this case was the clause that meant no other company could set a lower the price for the book ("Most Favored Nation"). So, if the book sells for $12.99 USD on the iBook Store, Amazon was not allowed to set any price below $12.99 on their store.

By doing it that way, publishers get to declare how much an ebook is worth, and you're stuck paying it regardless of where you buy it.

Without that clause, Amazon could price the book lower; not only does that make it more likely people will buy from Amazon, due to the agency model, the publishers get a smaller payment. Before the agency model, publishers would sell to the ebook store at a set price per-book; that meant the publishers were guaranteed a certain amount of money for each sale, but Amazon was free to price the book however they wanted.

The publishing companies figured out that if they could set the sale price high, and prevent ebook stores from lowering it, they'd get more money out of the agency model. However, if Amazon could sell the book cheaper, the agency model would mean publishers get a smaller cut, potentially smaller than the old model!

So basically, when Apple wanted to open the iBook store, the publishers saw their opening. Apple really wanted in, publishers weren't too happy about Apple's 30% margin unless they could set the price. So the both agreed to the agency model with the non-competition clause. They then went to Amazon and said, "If you don't agree to our terms, we'll pull all our books out of your estore." Which would've crippled Amazon's selection and drove people to other shops.

What's not clear in this case is who proposed the agency + price-fixing agreement to whom. Regardless, both Apple and the publishers agreed to something they knew would force other companies to fall in line, which is what the lawsuit is about: collusion to manipulate the market.

Targeted predatory pricing to drive competitors out of business is one of the nasty realities of the free market. Why should ebooks receive a special exemption?

It's not quite the same as that. This would basically put the publishing houses in control of the entire mainstream ebook market. Also, there's no physical product, so there's no supply limitation unless the publishers put one in place themselves.

This "Most Favored Nation" clause basically lets the publishers dictate how much you pay for that latest hit novel, regardless of what the market would price it at. It's not so much "forcing out competitors" as making the shops which sell your product set the price exactly the same as your actual competitors, or you don't get access to the product.

I'm all for competition but if Amazon are selling books below cost price isn't that considered dumping? It's definitely not sustainable or in consumers interests over the long-term.

It's probably actionable under the Sherman Act.

It's not really a great argument B&N have. They're basically saying that they should be able to break the law and subvert the market just because someone else will if they don't. That's just anarchy and the opposite of law and order. At that point, the guy with the biggest pile of guns wins.

The problem is that there is no incentive to buy digital copies of anything. Period.I can buy the physical versions of books, movies and music for the same,or cheaper, than their digital versions (as long as there are physical copies available).

When the first ideas of selling digital books, movies and music was discussed by the big companies, they promoted it as being cheaper for the consumers due to the savings in cost of production. However, they realized they could just pass that savings back to themselves in the form of higher profits. The way I see it, IMO, is that these companies are just refusing to compete, they don't want to lower prices because it means less profit for them.

Eliminate free or $0.99 books from the chart. Show a breakdown divided between ebook prices compared to hardbacks and to paperbacks. What is the average ebook price for when the book is only available in hardback?

There's a lot of interesting data that's missing (intentionally) from that chart...

I'm not sure what the take away is here. For starters, even prior to agency pricing it's debatable that Amazon held a monopoly in the e-book market. They were first to enter into a new market, a market you could argue that they created with the Kindle. It's not illogical that the only major player in a given market could have a 90% share. It takes more than a large share of the market to be a monopoly.

B&N is essentially arguing that they can't survive the current market without being allowed to keep the artificially high prices the publishers have negotiated with Apple. If that's true, it sounds like they're not in good shape to begin with. Should the government be sympathetic to book publishers' price fixing with Apple because retailers like B&N can't compete due to being saddled with huge costs that Amazon isn't? Borders is what happens if you sit on your heals while the rest of the world is getting busy innovating. I miss Borders in the same way that I miss my old neighborhood record stores but I understand why they don't exist anymore.

Point One:I own a very large Library of roughly 1000 Paperbacks (mostly collectible and vintage) , around 180 Hardcovers (mostly 1ST Editions) , and 302 Vintage Pulps (mostly scifi) .I buy only paper bound books and do not own nor care to ever own an Ebook.you can view a tone of cool stuff I own here on my Band & Main Website:http://www.bigmeathammer.com/gallery.htmPoint Two:I would never shop in these Corporate Stores like B&N and Books A MillionPoint Three:The majority of my Books were bought using nice small Bookstores so I would support the small and great Bookstores I hope never ever disappear.

Be my guest and see some of the Awesome Pulps and Rare Paperbacks I own on my Gallery Pages.Tons of old Astounding Stories, Planet Stories, Ace Double Novels , ETC.

B&N and other Corporates screwed the little shops over just like those Walmarts did.

I'm all for competition but if Amazon are selling books below cost price isn't that considered dumping? It's definitely not sustainable or in consumers interests over the long-term.

It's probably actionable under the Sherman Act.

The DOJ was asked to investigate Amazon in 2009 ( http://traderegulation.blogspot.com/200 ... igate.html ) and nothing came of it. Also, according to the collusion case filing, Amazon states that its ebook division has been profitable from the start. If true, that indicates that they weren't doing something unsustainable.

Barnes & Noble said it is disproportionately harmed by below-cost pricing because it both distributes e-books and runs brick-and-mortar stores that have much higher costs than digital businesses. Low e-book prices make it hard for physical stores to compete by establishing "artificial price points that are below costs," the company said.

This is really the crux of the argument and the falacy that most supporters of Apple resort to. Physical books and brick and mortar stores have "much higher" costs than digital businesses.

B&N also left off a bit of that last quote that should have said: Low e-book prices make it hard for physical stores to compete by establishing "artificial physical price points that are below costs".

No offense to those who work in book stores, but I'd rather my ebooks are not priced to subsidize brick and mortar stores.

Might as well go after Wal-Mart and stop them for selling books cheaper than Barnes & Noble. Because it will make prices rise.

Every since iBooks came out all we saw is prices go up. The publisher gets the same amount of money, why would they care if Amazon goes for slim margins. Means more of their book is being published, which could lead to more word of mouth and future purchases from the same author.

New market, new age. Less and less people are buying physical copies and wanting to go to big mega book stores.

The kicker also is some of this e-book prices are the same price as paperback...which would be more money to the publisher. Keep the same margin as they do with paperbacks, we could see cheaper e-books.

I understand B&N's fear, I mean look what happened to Boarders because they didn't have an e-reader. E-books are defintely killing physical bookstores the same way iTunes killed pretty much every record (CD) store. But they have a strong online store because of e-books, so why not close a few stores (In my tiny home town we had two B&N, one of them which was two stories, that we can barely support) and compete with Amazon on their own turf.

Businesses have to evolve in a rapid digital age, and B&N went in the right direction with the Nook. Now they're just being babies.

Edit;; I'll just sit here with my Sony e-reader and support not whiners.

Well, thank you Barnes and Noble, i now know you are the greediest of the eBook sellers. Consider my account closed.

Fact is, if Amazon does go back to its undercut pricing, B&N may have to leave the eBook business and others might as well. The good news is that since we use a free market system, competition will arise b/c there is money to be made and the consumers will benefit. If companies are no longer able to sell ebooks at prices they can profit from, publishers will either A) lower the % they get back from sellers or B) not sell ebooks and inevitably go out of business. Already independent publishing is on the rise and it will continue to rise-b/c there is money to be made.